Self-Employed borrowers do not want to report a Credit Score less than 680, which discourages them from applying to lenders. According to a Zillow study the Self-Employed make 81% more money than other borrowers but they get 40% less quotes for home purchase loans. The following are some reasons for the Self Employed to talk in more detail to lenders.
Lenders take into account many factors, eight core factors to be exact. They are willing to make exceptions with self-employed mortgages. You will need to figure out different types of lenders and the ones more willing to make exceptions.
Decision Factors in Loan Approvals
1. Credit Score
You can ask the lender if exceptions can be made if other items on the list below are above par. Typically a score of 740 or above will be appropriate for the best rates and all loan programs. A score below 700 will have higher rates and not be eligible for some loans.
Owner-occupied properties are offer the best rates because they are at the lowest risk. Second homes are more risky but can still receive the same rates. The highest risk and rates are rental properties.
3. Property Type
The least risky for lenders are single family homes. Due to the Homeowners Association being in good financial health, Condo’s carry some risk. Properties with two-four unit properties are the most risky unless you are planning on living in one unit.
4. Loan Product
Lenders consider long-term fixed loans less risky but the rates are higher.
5. Loan Amount
If your loan is more than $417,000 they will not sell your loan to Freddie Mac or Fannie Mae so they are willing to make more exceptions to keep you on their books.
6. Loan-to-Value Ratio
You will need a larger down payment but you will want this ratio to be as low as it can be.
7. Debit-to-Income Ratio
In order to get exceptions, a low DTI ratio is extremely important. You also need to have a loan officer that is an expert working with the Self-Employed.
8. Reserves After Closing
Lenders will normally look for a minimum of two to six months of monthly housing costs left in your bank account after closing.
Make sure you understand what you need if you’re trying to get a mortgage and you’re self-employed. It’s very possible to get the right mortgage for you, but it may be a bit of a process.